China's real unemployment rate is much higher than the
official rate and, when correctly measured, is much closer to that in
other nations at similar levels of development, according to Long Run
Trends in Unemployment and Labor Force Participation in China (NBER
Working Paper No. 21460). The study estimates that the actual
unemployment rate in 2002-09 averaged nearly 11 percent, while the
official rate averaged less than half that. Moreover, despite some
reports to the contrary, by 2009 China's labor market had still not
recovered from huge layoffs that occurred during the later 1990s and
early 2000s as the nation transitioned from a government-controlled
economy to one in which private enterprise and market forces were more
at play.

"The official unemployment rate series for China is
implausible and is an outlier in the distribution of unemployment rates
across countries ranked by their stage of development," write
researchers Shuaizhang Feng, Yingyao Hu, and Robert Moffitt. "We
find that, by approximately 2002, the unemployment in China was actually
higher than that of high income countries, exactly the opposite of what
is implied by the official series."

The official unemployment rate in China, which is based on
registered unemployment figures, has long been viewed with suspicion.
Various private studies have tried to come up with better estimates.
This paper uses for the first time a nationally representative sample of
registered urban residents--the "hukou" population--based on
urban household survey data, supplemented with weights derived from the
decennial census. The study derives a much different picture of how
Chinese unemployment has evolved since the mid-1990s.

The authors describe three distinct periods in China's labor
market. The first--from 1988 to 1995--was characterized by an economy
dominated by state-owned enterprises (SOEs). Unemployment was low: their
estimate suggests an average of 3.9 percent while the official average
was 2.5 percent. Then in 1995-2002, the unemployment rate rose rapidly,
by one percentage point per year, as SOEs shed massive numbers of
workers and rural migrants flooded the cities in search of jobs. SOEs
went from employing 60 percent of China's workforce in 1995 to 30
percent in 2002. Yet the official unemployment rate reflected none of
that volatility. Unemployment peaked in 2003 and began to fall in later
years, by the authors' calculations. It nevertheless still averaged
10.9 percent for the 2002-09 period while the official average was only
4.2 percent.

Compared to other nations with similar gross national income per
capita, China's unemployment rate in 2009 was relatively high. The
authors nevertheless caution against making direct comparisons with
unemployment rates in other countries, because China's urban
household survey data do not define labor-force status in exactly the
same way that many developed nations do.

Some groups had worse unemployment rates than others in the
transition years from 1995-2002. The study estimates that the jobless
rate was 18.3 percent for non-college-educated young women and 14.5
percent for non-college-educated young men. In contrast, the estimated
rates were less than 2 percent for older college-educated men and women,
whose advantage was evident both before and after the transition.

"Overall, we see that people without college degrees, younger
people, and females systematically face more slack labor markets than
their more educated, older, and male counterparts," the authors
conclude. "The most striking pattern is that younger people had
very high unemployment rates, especially for more recent cohorts....
Even at the age of around 30, the 1970s female cohorts had roughly a 10
percent unemployment rate, as compared to only 3 percent for females
born in the 1960s."

Unsurprisingly, some regions fared worse than others during the
transition. The Northeast, South Central, and Southwest regions of the
country saw the largest increases in their unemployment rates during the
1995-2002 period. These were also the regions with the greatest number
of SOE layoffs. In the Northeast region, for example, some 7.3 million
workers were laid off during the period--42 percent of its total SOE
employment in 1995.

While China's unemployment rate has soared since the
mid-1990s, labor force participation has dropped. Participation averaged
83.1 percent around 1995, fell dramatically during the transition, and
stabilized at around 74 percent during the 2002-09 period. Young people
were hit especially hard by the layoffs during the 1995-2002 period. The
labor force participation rate of young men and women, with and without
college education, all fell by more than 10 percentage points.

"The results suggest that cohort differences might be in play
and that the younger generation may have faced higher cost and/ or lower
benefit in participating [in the] labor market," the authors
conclude.

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